Patrick McCray and Arie Rip are certainly right about the dangers of "folk theories." The world is full of these things and is often run by them. Empires rise and fall on the basis of mythological histories. Weekend potsmoking leads to heroin addition, premarital kissing to teen pregnancy, welfare to dependency, free trade to untold riches - or so our folk theories say.
Still, the false analogies on which these theories rest can provoke lots of creative thinking, as long as we remain aware that the analogies are imperfect. So here's another one between nanotech and biotech. In the midst of Wall Street's celebrations of their extreme bonuses - averaging $623,000 per employee at Goldman Sachs, for example - there have been articles about tech stocks that haven't done so well. One is Sun Microsystems, a company that over the years has produced much interesting strategizing about commercial versions of open-standard and even open-source, but that may now be in irreversible decline. This is not particularly good news for tech industry in general, which is overly-dependent on proprietary systems that, for reasons I'll blog about later, are increasingly difficult to protect (even assuming we should). But back to my point: Another piece in the Wall Street Journal talks about the drastic response of capital markets to failed drug trials. Herb Greenberg writes,
The six most expensive words for investors in drug or biotech companies are: "This is money in the bank." Nuvelo Inc. and NeoPharm Inc. proved that convincingly this past week, with a substantial amount of their value wiped out after reporting disappointing late-stage clinical trial results. And let's not forget the recent brouhaha when Pfizer Inc. abruptly halted trials of its torcetrapib "good cholesterol" drug following unexpected deaths.
Greenberg goes on to cite David Miller, an analyst at Biotech Stock Research, saying that only one out of every ten biotech companies succeeds. Since the nerves of biotech investors are permanently on edge, one bad trial can cause a company to lose half its value in one day, or, in some cases, all of it forever. Remember Shaman Pharmeceuticals, innovators in treatments for a range of common illnesses that damage everyday life and productivity in many tropical nations? You don't, but I do. It was my first investment ever - a tip from a biotech researcher friend, of course, sometime around 1997. One month my $2000 was still hanging in there at around $1650. The next month some shift in the wind meant that my stock was delisted and my two grand had been turned into 19 cents. Which I then grew back to $1.95 through weeks of brilliant day trading, but that's another story.
What the hell - that's life on the tech frontier, right? Big downs, but also the big ups. You rolls the dice, you takes your chances. Well maybe you do, if you're the type that plays the slots in Nevada's state line casinos. Professional investors don't roll the dice and do minimize risk - that's the only way they can win more often than they lose, and win big rather than win small. Investors quite rationally look for low rather than high risk for a given expected return.
This means that investors do not love research, in spite of how smart money always claims to be funding smart products and new industries: economists like Richard Nelson and Kenneth Arrow showed almost fifty years go that fundamental research is very risky research. Biotech is a good example. Over thirty years after the Cohen-Boyer patents on recombinant DNA technology launched the age of biotech, companies in the field have a 90% failure rate. Most of these failed companies have been based on strong, promising research: they fail because it was "only" research, and investors are looking for products, sales, and revenues.
This raises two crucial questions.
1. will private investors properly fund nanotechnological research?
2. will private investors fund this research through its inevitable ups and downs?
Though we often ask such questions, we don't know the answers - not for the diverse fields that make up nanotech, and not for biotech either How many great biotech ideas never found (or later lost) their investors and still sit on a shelf in the dark?
By the way, here are "year-in-review" figures for 2006:
University of California 10-campus federal research funds, no DOE labs:$2.2 billion
National Nanotechnology Initative (NNI) budget, all agencies, :$1.06 billion
NNI budget, risk analysis (Wilson Center estimate): $0.011 billion
Goldman Sachs, 2006 year-end funds to distribute as bonuses: $16.5 billion
Just one good year's bonus pool at a leading Wall Street investment bank could pay for seven years of systemwide research, sixteen years of the National Nanotechnology Initiatve, and, um, sixteen centuries of nano-related risk analysis. We'd better get going!